1
MASTER’S THESIS
THE IMPLICATIONS OF BREXIT ON EUROPEAN CONTINENTAL
BANKS’ STRATEGY IMPLEMENTATION
MANAGEMENT RECOMMENDATIONS
Rijksuniversiteit Groningen Faculty of Business and Economics
Master of International Business & Management
Lead supervisor: Prof. Dr. Hans van Ees Second supervisor: Dr. Lipeng (Gary) Ge
Written by
Philip Richard Gibson S4212401
15.932 words 18.01.2021
2 Abstract
A growing body of scholarly work has been emerging in the field of strategic management with regard to external shocks due to their importance to the banking industry and its path to greater internationalization (Sist, 2018). Brexit, as an external shock, poses a direct threat to this internationalization path of European continental banks (Ecbs) as they have the highest financial claims in the UK and is of strategic importance for both sides (Armour, 2017).
Furthermore, the implications of Brexit on Ecbs are still unknown and in widespread dispute (Baier & Welfens, 2019). This research aims to explore the different implications of Brexit and Ecbs strategy implementation by researching how it is perceived by different employees working on implementing the strategies. The data sources are interviews with bank managers and associates that have been witnessing Brexit’s implications at first hand. By integrating literature from strategic management as well as the financial markets this research attempts to understand the challenges imposed by Brexit on Ecbs and how it affects their strategic choices.
Within the analysis, the topics of Causality, Criticality. Compatibility and Clarity were found to be necessary. The concept of Clarity was identified as the most relevant for a successful strategy implementation for Brexit. The goal of this research is to propose recommendations for bank managers on how to successfully implement a working strategy for Brexit and which concepts can support this process. This research hopes to inspire further research into Brexit and its implications on the banking branch in Europe.
3 List of abbreviations
European Central Bank - ECB European continental bank – Ecb European Economic Area – EEA European Union – EU
Human Resources department – HR department Top management team - TMT
UK – United Kingdom
4 List of Tables
Table 1 - Validity & Reliability criteria (own creation, 2020)………...27
Table 2 – Contextual categories for Strategy development – Ploy……….29
Table 3 – Exemplary quotations for Strategy development – Ploy………30
Table 4 – Contextual categories for Strategy development – Pattern………31
Table 5 – Exemplary citations for Strategy development – Pattern………..32
Table 6 – Contextual categories for Strategy development – Perspective……….33
Table 7 – Exemplary quotes for Strategy development – Perspective………...33
Table 8 - Contextual categories for Strategy implementation – Causality………35
Table 9 – Exemplary citations for strategy implementation – Causality………...36
Table 10 – Contextual variables for Strategy implementation – Criticality……….37
Table 11 – Exemplary citations for Strategy implementation – Criticality………...38
Table 12 – Contextual categories for Strategy implementation – Compatability……….39
Table 13 – Exemplary citations for Strategy implementation – Compatability………...40
Table 15 – Exemplary citations for Strategy implementation – Continuity………..42
Table 16 – Contextual variables for Strategy implementation – Clarity………...43
Table 17 – Exemplary citations for Strategy implementation – Clarity………..44
5 List of figures
Figure 1: Conceptual framework Thesis proposal Philip Gibson (own creation, based on Mintzberg (1987) & Maclennan (2016))……….16 Figure 2 – Information about the interviewees and their primary occupation (own creation, 2020)………..22 Figure 3: Adapted conceptual framework (own creation, 2021)………..55
6 Table of Contents
1. Introduction………7
2. Literature Review. ………...10
2.1. Discussion of relevant theories and constructs………..10
2.1.1. Strategy development………...10
2.1.2. Non-market strategy development………12
2.1.3. Strategy implementation………...13
2.2. Brexit context description and outline of relevant factors……….16
2.2.1. Definition of Brexit and uncertainties created………...16
2.2.2. Three possible Brexit scenarios……….18
2.2.2.1. Soft Brexit………18
2.2.2.2. Bilateral agreement………...19
2.2.2.3. Hard Brexit………...19
2.2.3. UK Real Estate & Capital Markets………19
3. Methods, Context & Data……….21
3.1. Case Selection………...21
3.2. Sampling………...21
3.3. Data collection………..22
3.3.1. Interview procedure………..22
3.3.2. Document collection……….23
3.3.3. Method of analysis………24
3.3.4. Coding………..24
3.4. Validity & Reliability………...25
4. Results………..28
4.1. Strategy development………...28
4.1.1. Ploy………...28
4.1.2. Pattern (including Plan) ………30
4.1.3. Perspective (including Positioning) ………..32
4.2. Strategy implementation………...34
4.2.1. Causality………...34
4.2.2. Criticality………..36
4.2.3. Compatability………...38
4.2.4. Continuity……….40
4.2.5. Clarity………...42
5. Discussion………45
5.1. Strategy development………...45
5.1.1. Ploy………...45
5.1.2. Pattern (including Plan) ………46
5.1.3. Perspective (including Positioning) ………..48
5.2. Strategy implementation………...49
5.2.1. Causality………...49
5.2.2. Criticality………..50
5.2.3. Compatability………...50
5.2.4. Causality………...52
5.2.5. Clarity………...52
6. Conclusion………56
6.1. Limitations………57
6.2. Future research possibilities……….……….57
7. References………59
8. Appendix………..64
7 1. Introduction
Business management scholars increasingly recognize that external shocks do not only lead to recession and uncertainty (Kenourgios, Dadinakis, & Tsakalos, 2020) but can also lead to opportunities on the market which can be harvested if companies are ready to capitalize on them (Eichengreen, 2019). Internationalization of banks is a topic that has been in the focus for a share amount of time but did not receive much attention in the existing literature (Sist, 2018).
The increasing trend of internationalization in the banking sector arouses more interest in that matter (McCauley, McGuire, & Von Peter, 2010). External shocks like the Brexit mean serious challenges for the internationalization of banks (Baier & Welfens, 2019). Ecbs will recognize these challenges when it comes to choosing their strategies abroad, as five of the top seven banking partners in the UK are from Continental Europe and have the highest financial claims in the UK, as shown in Appendix A. In connection to this, the implementation of strategy due to Brexit is still immersed in a widespread dispute (Armour, 2017). Hence, the following research question has been developed: “How is Brexit affecting the strategy implementation process of a European continental bank?” The research findings of Mintzberg (1987), are utilized as they show a processual approach to strategy which fits well, as the implications of Brexit are still widely unknown, and the strategy development and implementation is still ongoing. This allows to understand Brexit strategies and how they are implemented: For the implementation of those corporate strategies the findings of Maclennan (2016) support the answering of the research question as the results show that there are common misconceptions and problems concerning strategy implementation, on which this paper can contribute more information.
Mintzberg (1987)’s approach to strategy development culminated in the concept of “The 5P’s of Strategy” which the author is going to utilize in order to research the influences of strategy development within banks. This is important as a successful strategy implementation only works if the development is done correctly, hence this paper analyzes development as well (Zeps & Ribickis, 2015). Afterwards the author is going to focus on the translation of strategy into actual corporate actions. One might think that this challenge should have been properly addressed by consultants and business researchers, however there is no widely accepted method for translating strategy into activities. Actually, the research of Corboy and Corrbui (2007) reveals that up to 70% of business strategies fail when implemented. Within this field of research, early contributors proposed models for the Top-management-team (TMT) that help guiding the strategy implementation (Charan & Colvin, 1999). Afterwards, a change of tactics followed, and a second wave of researchers proposed strategic process models (Nutt, 1999)
8 (Corboy & Corrbui, 2007). These models shifted focus from the considerations of managers regarding strategy, but instead would outline how managers might determine the most appropriate topics to address in certain situations.
The present study aims to examine through which factors Brexit is influencing strategy implementation by looking at the developed strategy and checking which measures were conducted. Hence, the conclusion of this paper is the formulation of managerial advices for improving the implementation of strategic changes in Ecbs. The research question is formulated as follows: “How is Brexit affecting the strategy implementation process of a European continental bank?”. To be most concise when researching possible improvements for strategy implementation, the author chooses two exemplary branches that have been affected the most by Brexit, the real estate financing branch, and the loans / capital market branch (Giammetti, Russo, & Gallegati, 2020). This allows an in-depth insight in the strategy implementation process of a Ecb.
The previously described opportunities by (Eichengreen, 2019) are usually formed by exogenous markets and/or an industry shocks like Brexit (Shane & Eckhardt, 2003). “The only thing that I know for sure is that the people who invest in the U.K., those investors, believe strongly that the ramifications of a hard Brexit are very bad, and they believe that a recession will take place in the U.K., and that would clearly be negative for banks [present] in the U.K.”
(DeCambre, 2019). This famous quote about the Brexit is taken from Steve Eisman, a well- known businessman, and one of the few persons that anticipated the financial crisis of 2008.
Likely effects of Brexit have already been in the academic spotlight over the past years, even before the official referendum was announced. Several studies appraised the impacts of Brexit, differing in terms of methods and scenario designs. These studies investigate possible changes to the EU internal market (Booth, Howarth, Ruparel, & Swidlicki, 2015), (Busch & Matthes, 2016),(The future of the European Union: UK Government policy. First report of the session 2013-2014, 2013). Also, different policies have been researched (Harvey & Hubbard, 2016) or the financial stability in the banking sector itself (Samitas, Polyzos, & Siriopoulos, 2018). Note that all these studies only show country-level outcomes. As the available literature suggests the clear need to further explore the company-level gap, this is where this paper’s contribution generates further insights using a qualitative approach. The practical implications of this study can be utilized by business scholars and managers to understand the influences for strategic choices and decision-making regarding implementation within Ecbs.
9 This research paper is organized as following. chapter 2 contains the literature review comprised of relevant studies. chapter 3 contains the used methods, context, and data. In chapter 4 the results of the study are presented. chapter 5 is comprised of the discussion of the results and puts the paper into perspective to other relevant studies. In chapter 6 a conclusion is drawn, and the limitations and possible future research is highlighted.
10 2. Literature review
The Brexit vote has created many uncertainties and changes to the way Ecbs are able to conduct business in the UK. However, the question remains, how Ecbs are coping with these changes in terms of strategy implementation. To answer this question the literature review will be structured as follows: Subchapter 1 focuses on the discussion of relevant scientific theories by evaluating literature regarding strategy formulation for Ecbs. In this chapter, there is also a differentiation between strategies and non-market strategies and aspects of both are shown to outline which barriers Ecbs have to overcome when challenged with political uncertainties. This is followed by a discussion of the relevant theories regarding strategy implementation, which ultimately results in the conceptual framework used for this research. Subchapter 2 outlines a detailed context description and provides a summary of the most important elements of the business environment and related current and future developments in view of Brexit. This is done by first defining Brexit and the macroeconomic uncertainties it created and outlining the three possible scenarios for the UK to leave the EU. Afterwards, an outline of the implications of Brexit for the real estate and capital market is made.
2.1 Discussion of relevant theories & constructs 2.1.1 Strategy development
Connecting Brexit to the strategic issues at hand it is key to distinguish between the development of strategy and its actual implementation as strategy development always influences the implementation (Ahlstrand et al., 2001); (Mintzberg, 1987); (Mintzberg et al., 2003). As Sir Winston Churchill once said: “However beautiful the strategy, you should occasionally look at the results.” (Goodreads, 2020). Defining strategy has been a matter of some debate (Ahlstrand, Lampel, & Mintzberg, 2001). According to Ahlstrand et al. (2001) number of common topics always emerges from these definitions, suggesting that strategy integrates long-term objectives and is about a plan for achieving them, relating to managing interactions with the environment, market, and product scope of business divisions as well as resource allocation. The formulation of corporate strategy has been researched extensively with Mintzberg, Ghoshal, Lampel, and Quinn (2003) stating that the strategies of companies often develop very quickly at top-management-team level within organizations, with a few key considerations only dealing with how possible changes of strategy would benefit the company.
Usually this is a good starting point for the basis of strategy, however there are far more factors that should be considered for developing a well-rounded approach. Topics like the external environment of the company, its competitors as well as its corporate culture and values should
11 also be included. The ideas of Mintzberg (1987) culminate in the 5 P’s of strategy, which he developed to suit the different demands and strengths of all organizations. They all refer to different approaches of organizational strategy:
The first P is ‘Plan’. Planning is one of the natural approaches to a lot of daily tasks and activities. It is also the default approach for developing an organizational strategy;
brainstorming, mind-mapping, etc. However, planning on its own is not enough to develop business strategies {Mintzberg, 1987).
The second P is ‘Ploy’. This term refers to activities that are actively dependent on the actions of other participants. This can be utilized by companies when they plot to influence their competitors in various ways, e.g., through dissuasion or disruption. This helps the company to grasp its external environment and others within it while developing a strategy. For this part to succeed the top-management-team needs to be able to identify and analyze future opportunities, including the possible actions of competitors and understand how they can be influenced (Mintzberg, 1987).
The third P is ‘Pattern’. It is important to mention, that plans, and ploys are examples for very deliberate strategies. Organizational strategies can occasionally emerge from past organizational behavior, learning which actions work and which do not or just from unexpected events like external shocks. These ‘emergent strategies’ are not part of a conscious choice but rather a result of discovering a consistent and successful approach of conducting business.
These strategies are usually built up by a large number of small decisions made and solutions found. The TMT is not aiming at gaining a strategic advantage by making wise decisions, usually it finds itself with a good one (Mintzberg, 1987).
The fourth P is ‘Position’. It refers to where and how an organization identifies itself in a given market environment. Here, the organization performs a full analysis of its environment and the opportunities present to facilitate the development of a sustainable competitive advantage by composing key strategic decisions and planning. It is key to know, that ‘Position’ is overlapping with other P’s and can be used in connection with another approach for strategy like ‘Ploy’ or
‘Plan’. One way of differentiation for a company is the development of unique products and services (Mintzberg, 1987).
The last P is the ‘Perspective’-approach. It is derived from a company’s corporate culture within as well as its values and overall goals. The TMT should always be aware of the corporate culture
12 when approaching planning and how it could affect decision-making and behavior (Mintzberg, 1987).
In order to make it easier for the reader to follow the different concepts for strategy development, the author chooses to include the concept of ‘Position’ into the concept of
’Perspective’ as the positioning of an organization within a given market environment is mostly derived from its overall values and overall goals and can therefore fit into the ‘Perspective’- concept which indicates a similar approach. The same procedure is done for the concept of
‘Plan’, which is included in the concept of ‘Pattern’ as planning involves approaches to a lot daily tasks and routines which are also analyzed within the concept of ‘Pattern’ as this follows a similar approach. This makes the analysis and discussion of the research results more congruent.
2.1.2 Non-market strategy development
The non-market strategy formulation is addressed by a large body of literature and shows how organizations try to influence their ‘non-market environment’. This includes governmental regulations, legal restrictions, boycotts by activists or Non-governmental organizations as has a significant effect on the corporate competitive environment (Baron & Baron, 2003), (McDonnell, 2016). The non-market environment has been perceived by companies as exogenous (McDonnell, 2016). Nowadays, and especially in light of Brexit, many corporations extend the scope of strategic thinking by incorporating activities that influence decisions of political, legal, or social actors (Funk & Hirschman, 2017), (Werner, 2015), (Guo, Xu, &
Jacobs, 2014). ‘Strategy’ in this aspect regards to activities that are suitable to create future value in terms of success potential or result in a competitive advantage (Johnson, Melin, &
Whittington, 2003). Important here is the firm age, acting as an internal antecedent in the revised literature. The argument brought forward is, that firms which are active in a market for a long period of time have a greater credibility and reputation (legitimacy) in host countries due to their accumulated experiences and alliances there (Lamberg, Skippari, Eloranta, &
MÄKinen, 2004), (Hillman, Keim, & Schuler, 2004). The greater the amount of non-market strategy development, the more employees or specialized departments can be needed which may be hindering the successful output of these strategies (Schuler & Rehbein, 1997). The TMT also plays an important role here, as they mainly determine the financial resources allocation, which also includes allocating a specific budget for non-market strategy development (Wilts, 2006). Furthermore, the market environment is essential as it is defined by interactions between corporations, suppliers and clients who are either governed solely by the market or private
13 agreements (Baron & Baron, 2003). Within the reviewed literature, these interactions as well as contextual elements were identified as having an influence on non-market strategies.
Exemplary for the banking industry is, that it is highly regulated (Sist, 2018). In the literature it is assumed that the more regulated an industry is, the more political strategies will be used to gain access to political actors and influence them in favorable ways for the firm (Hillman et al., 2004).
2.1.3 Strategy implementation
When the strategy formulation process is completed it is a key necessity to implement it.
Grünig, Kühn, and Montani (2018) divide the implementation of a companies’ strategy into three subtasks: First, the strategy must be summarized in comprehensible and well-presented documents. Second, the strategy has to be formally approved by the relevant boards, and third, especially managers must be informed about the strategic intentions because they will be heavily involved in implementation. This is the ideal sample form for strategy implementation according to (Grünig et al., 2018) (see appendix E). MacLennan (2010) researched that the bridging of the gap between strategy and operations is the core strategy execution challenge, meaning the translation of objectives into activities. For the financial services branch and especially banks this is connected to a vast number of rules and regulations (de Mooij &
Nicodème, 2014). When examining the quality of strategic planning or the effect on corporate performance, there is limited evidence that the practice is statistically associated with superior financial performance (Herold, 1972), (Armstrong, 1986), (Boyd, 1991). On the other hand, when a corporate strategy implementation fails, there are empirical suggestions, that relatively few strategies result in the financial performance outcomes they aim to achieve (MacLennan, 2010). A few indications made by MacLennan (2010) for possible implementation problems point out that either the strategy does not have sufficient market or technical validity, or the strategy has not been broken down enough, or that there is no real strategy execution framework or that the strategy is not being understood by the people responsible for implementing it. All these arguments lead in the direction of the common complaint, that the TMT develops and writes up strategies, but these strategies are then not effectively used to drive corporate actions (MacLennan, 2010). Maclennan (2016) established the “5-Cs” for successful strategy execution, as the problems identified in the respective strategy literature were still not sufficiently solved. In this paper, five core principles for translating strategic topics and objectives into actual implementation are outlined and described:
14 The first C is called “Causality”. It refers to activities within a company that ultimately cause their strategic objectives defined to be achieved. These activities are supposed to close the cognitive gap between ideas and actual actions. This is achieved by explicit cause-and-effect reasoning by aligning projects and initiatives with strategic objectives. Here, companies need to manage this alignment process between cognitive barriers and clear actions with clear communication.
The second C is called “Criticality”. Criticality is important as organizations undertake several activities which are all part of a complex system, making it impossible for organizational leaders to analyze and refer to all these different activities. To implement a newly developed strategy within a company, it is a key necessity to reduce the complexity of tasks and focus resources and attention on a number of critical activities that help deliver the strategy. Isolating these critical activities from the rest can help the TMT to resolve many dilemmas in implementing strategic choices.
The third C is called “Compatability”. This term refers to ensuring that the identified critical activities identified in the previous step will all pull the company in a consistent direction strategically. To put this into perspective, activities that individually appear to constructively support strategic objectives and tasks may, if put together, have a different effect if they are incompatible. An example for this would be a company that relies on the creativity and innovative drive of their employees but also operates a prescriptive performance management system, that is not supporting unplanned or creative activities. Many failed strategic implementations failed due to compatibility problems which can ultimately lead to jeopardizing corporate reputations, fraudulent account or auditing processes, bribery, etc.
The fourth C is called “Continuity”. The priorly named three strategy implementation challenges allow the identification of activities which are supporting the theoretically developed strategies to be realized. However, solely identifying critical processes is usually not enough, these tasks must also be delivered, so organizational designs systems and constructs need to be shaped and aligned accordingly. Strategy development is usually passed down from the top through hierarchies. Within this process, departments and individuals have to interpret the overall organizational intentions, therefore determine how they can contribute and ultimately act. It is a great challenge to ensure coordination and collaboration between organizational departments which have to work together to deliver the critical activities that drive strategic change and ultimately implement it. Continuity is also an important aspect to consider over
15 time as it creates a sense of long-term orientation aside from short-term distractions, structural reorganizations, TMT-changes, budget reallocations etc.
The fifth and last strategy implementation challenge is called “Clarity”. There is strong empirical evidence that it is of key importance for employees of a company to understand why activities are undertaken as this motivates those responsible for carrying them out. This occurs because meaning is derived from the means by which one contributes to achieving important outcomes. If employees are to take good or “the right”-decision in their professional roles, they need to be able to understand strategic priorities and the trade-offs leading there. The employees need to see how their own decisions and actions are going to plausibly cause overall strategic objectives to be achieved (causality) and what the essential performance drivers are to prioritize their time and effort (criticality). It is not advisable to pull them irreconcilably in different directions (compatibility) or given unproductive tasks and disengage them by failing structures and organizational systems (continuity). In this instance, clarity over all these issues increases goal congruence.
Also, when companies develop a strategy and a plan for its execution, it can run the risk of
“elite bias”- referring to involving only senior executives and only using their viewpoints and information provided by them (Pakulski, 2018). Scientific evidence shows that strategy implementation is far more likely to succeed when it is planned with the involvement of employees form a wide range of levels and subunits across a company. For this, it is essential that individuals within the company recognize the important bits of information available to them, so that it can be flagged when they discover something that helps the company as a whole (Maclennan, 2016).
If, a company focuses on critical activities while ensuring their compatibility in terms of continuity and clarity, these challenges offer the scope to avoid the pitfalls of strategy execution and create long-term value and a competitive advantage (Maclennan, 2016). The literature review shows that significantly more is known about the formulation of a corporate strategy than the strategy execution and its consequences for the banking industry with regard to Brexit.
The literature review culminates in this conceptual framework:
16 Figure 1: Conceptual framework Thesis proposal Philip Gibson (own creation, based on Mintzberg (1987) & Maclennan (2016))
2.2 Brexit context description and outline of relevant factors 2.2.1 Definition of Brexit and uncertainties created
The term ‘Brexit’ refers to the historic referendum of June 23rd, 2016, where the citizens of the UK voted to leave the EU after more than four decades (Kenourgios et al., 2020). There is no simple way to define the entity which is the EU. Attempts include ‘multilevel political system’
(Lacey, 2016) and ‘multiperspectival society’ (Diez, Manners, & Whitman, 2011). The most fitting definition for this proposal is that the EU, in terms of integration is, that it is greater than an international organization, containing thin democratic but even richer demoi-cratic elements.
Demoi-cracy is the normative commitment to rule together but not as one (Wilson & Oliver, 2019). ‘Brexit’ is a made-up term by the media from the words “Britain” and “exit” and is quite misleading, as Britain would not be leaving the EU, but rather the UK, which includes England, Scotland, Northern Ireland, and Wales (BBC, 2020). The success of the ‘leave’ vote with a 52%
majority, stunned major political parties and the media (Martill & Staiger, 2018). The process of UK’s withdrawal from the EU will have a significant impact on all aspects of the country’s political, juridical, and economic development (Martill & Staiger, 2018). The effects of Brexit however will not only stay within the UK but affect the financial industry the most as it is the largest one in Europe, shown in Appendix B.
17 The city of London has been the global leader for international banking services since the 1980s.
The Margaret Thatcher-era deregulation of the financial markets as well as the EU-single market program stimulated international FDI inflows from banks across the globe in the UK (Baier & Welfens, 2019). The “single passport” legislation allowed international banks present in the UK to serve every country in Europe (EU28) with financial products such as loans, derivatives and foreign-exchange rates from London which increased economic growth in the UK and raised the output share of the UK banking system within the British gross domestic product (GDP) (Baier & Welfens, 2019). London’s future as a financial hub will significantly depend on maintaining the “passporting” rights, if any, obtained by UK banks (Eichengreen, 2019). FDIs within the UK have contributed tremendously to making the city of London the biggest financial center in the world, having been involved in the design and implementation of EU financial services and banking regulations for decades (Eichengreen, 2019). To put this in perspective, more than 90% of the euro-dominated interest rate swaps conducted by EU banks, three-quarters of all foreign-exchange transactions, half of all financial lending, and half of all securities transactions within Europe occur in London (Couré, 2017).
With Brexit, the UK will face tremendous challenges regarding the financial sector, keeping above mentioned advantages and the foreign banks’ FDI inflows (Couré, 2017). According to Boutchkova, Doshi, Durnev, and Molchanov (2012), industries with complex input structures, like the banking and finance industry, are more likely to have their transactions disrupted when the contract enforcement environment is weak, as it is way more costly for them establishing long-term relationships with their clients. In addition, policy changes lead to share price declines and uncertainty. Some banks have already acted on the potential risks of Brexit:
Barclays bank announced in 2018, that they were relocating a portion of their euro-interest- rates trading team from London to the separately capitalized subsidiary in Dublin to ensure the maintaining of business with its EU-clients (Eichengreen, 2019). Other banks followed in similar fashion. For example, to maintain the EU clearing business, the Intercontinental Exchange has been established, through which security transactions with EU-clients can be conducted as regulators were prohibiting this before (Eichengreen, 2019). Brexit will potentially complicate these operations, since it is based on regulatory regimes, as determined by the European Commission and on EU law (Couré, 2017).
What don’t we know about the Brexit? It is still unclear, how Brexit is going to affect international banks offering financing solutions in the UK due to a lot of uncertainties (Baier &
Welfens, 2019). These uncertainties and downwards forecasts are first caused by the notion that
18 after the Brexit, the barriers between the EU and UK are going to increase. As these barriers increase, it is most likely that the costs of trading between the two parties will also increase.
The argument, that trade barriers can only increase is due by the fact that in the last decades, the UK benefitted vastly from no-tariff barriers and customs procedures within the borders of the EU. The EU in this regard, goes beyond any standard free-trade agreement as it equips all its member states with access to an internal single market (Industry, 2020). Therefore, a standard trade-agreement between the negotiating parties can never decrease barriers, but certainly increase them.
Furthermore, it is still unknown what kind of agreement will be negotiated between the two parties UK and Europe. This uncertainty about what sort of deal will finally be negotiated, increases the indecisiveness among the companies active in the UK further. As the deal is still not certain, there cannot be any clarity among the parties about how large the earlier described increase in barriers will be. Moreover, the possibility of a “no-deal scenario” between the EU and UK still remains, which includes that there is no trade agreement at all. Without a trade agreement, the trade rules between the EU and UK are going to be based on the World Trade Organization rule (News, 2020). This scenario almost became reality March 2020. Per official date, the Brexit should have occurred the 29th of March 2019. However, due to a lack of agreement and compromises, which would have resulted in a no-deal Brexit, the parties agreed on delaying Brexit as they want to prevent a no-deal scenario. Furthermore, it remains unclear whether London will lose the transactions of EU-based entities only, or also euro-denominated transactions of extra-EU market players (Eichengreen, 2019). This would affect the strategy formulation of EU banks as there is the possibility, that the entire market of transactions could move to Paris or Frankfurt (Butcher, 2020): If agglomeration economies were pronounced, pushing a major percentage of euro-related transactions to Paris/Frankfurt may tip the system from one increasing-returns equilibrium to another (Eichengreen, 2019). This could mean, that advantages of extra-EU market players would be overwhelming, and the entire market could migrate away from London posing major changes in strategies for EU banks (Eichengreen, 2019). The outcome will also rely on whether further standardization of financial products is achieved by changes in the information environment, financial technology, and regulation. This would create a tendency for business to concentrate in one single financial center in the EU, or whether financial differentiation supports multiple ones (Eichengreen, 2019).
2.2.2 Three possible Brexit scenarios:
2.2.2.1 Soft Brexit
19 Soft Brexit refers to the UK leaving the EU but remaining a member of the European Economic Area (EEA), still receiving access to the single market (Armour, 2017). The EEA agreement allows countries to access for “freedoms”, goods, persons, services, and capital and also to partake in the company law and financial services (Agreement on the European Economic Area - Final Act - Joint Declarations. Declarations by one or several of the contracting parties of the agreement on the European Economic Area, 1993). Also, the UK would need to implement EEA-relevant EU rules, however it would not have any say over its content (Moloney, 2016).
2.2.2.2 Bilateral agreement
Given the level of financial activities between the UK and EU, this would have clear benefits for both sides, as it could include free trade in goods, particular measures for financial services on the expense of the EU demanding the free movement of its citizens, which could be problematic for UK politics (Hoffman, 2016). For this scenario it will prove helpful to consider the impact on the EU banking branch if the UK simply leave the single market without any agreement to understand bargaining positions (Armour, 2017).
2.2.2.3 Hard Brexit
According to Armour (2017), a hard Brexit implies that the UK becomes a third country and all the entitlements it holds will be ceased. Furthermore, there will be no more EU passporting rights and the single market would become irrelevant for the UK. This scenario would increase the level of required scrutiny resulting in higher costs for each national decision-making authority and makes it a lot harder to control system risks occurring on the financial markets (Cunliffe, 2016).
2.2.3 UK Real Estate & Capital Market
Brexit poses a direct link between political uncertainty and real estate values as the research of (Monfared & Pavlov, 2019) shows. This is due to various implications for the real estate market:
On the one hand, the immigration status of EU citizens who have established themselves in the UK becomes unclear which leads to uncertain growth numbers of EU citizens as well as on the other hand the future of trade-dependent businesses as potential employers becomes uncertain.
This leads to the assumption, that the real estate supply will rise while the expected future demand is going to be reduced, lowering the real estate prices and market values (Monfared &
Pavlov, 2019). In addition, Ecbs that are financing real estate in the UK need to recalibrate their financing strategies (Monfared & Pavlov, 2019). There are several studies about the impact of external shocks on supply and demand and real estate markets. These studies, however, do not
20 tackle the Brexit as a topic but focus on sales in Singapore (Liao, Zhao, Lim, & Wong, 2015) or the non-resident real estate demand of Paris (Cvijanovic & Spaenjers, 2015). There are also various studies that use Canadian data to research the effect of immigration to local real estate prices (Gyimah, Walters, & Phythian, 2005), (Moos & Skaburskis, 2010), (Akbari & Aydede, 2012). Here, a clear gap for the implications of Brexit on the European housing market exists which this thesis research is investigating.
Capital markets are heavily affected by Brexit, as the UK financial sector contributed around 6% in terms of value-added GDP (Mullineux, 2019). Furthermore, the UK’s percentual share of the financial markets ranged from 82% in interest rate over-the-counter derivatives, 78% in Foreign exchange trading, 49% in hedge fund assets, and 50% in funds management (Mullineux, 2019). Also, London’s global market share for financial services is at 39%, only second to New York City with 41% (Mullineux, 2019). Firms engaged in international activity need to comply with every regulation by every country they operate in (Armour, 2017). This does not apply for operations within the EU, as the member states agreed to general laws that apply for every country within Europe (Lamandini & Muñoz, 2017). Furthermore, the banking sector relies on the free movement of its workers to maintain a pool of human capital for recruitment (Portes & Forte, 2017).
To sum up the literature review and focus on the key concepts it is necessary to refer to the Princeton psychologist George Miller (1956) article “The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information” which analyzes short- term memory span and people’s ability to recall items on a list. The conclusion of the article states, that most readers can only recall around seven to eight items. Due to this article and the truth that there is no simple solution for every strategy execution challenge (Maclennan, 2016), three challenges for strategy development are highlighted in this study as a starting point and afterwards five strategy implementation challenges are analyzed, in total eight concepts, to answer the proposed research question.
21 3. Methods, Context and Data
3.1 Case selection
To answer the research question: „How is Brexit affecting strategy implementation in a European continental bank?” the author is going to conduct semi-structured, in-depth interviews with experts working in either real estate departments or capital markets departments. The research question is open and requires extended responses which cannot be observed with a simple questionnaire (Gillham, 2000). This allows for utilizing interview evidence that helps tease out and model the ways in which Ecb active in the UK responded to the changes imposed by Brexit. By researching at the level of individual companies, this body of work does not only offer important empirical insights regarding the strategy implementation process of a Ecb but also provides the basis for the on-going development of new strategies by linking it to existing literature. These robust and insightful conclusions regarding strategy implementation processes, incorporating the changes in organizational behavior could not have been achieved in detail by conducting a quantitative study as this qualitative study provides the chance make controlled comparisons outside the small sample and to discuss the results with other samples (Thompson, 2004). In comparison to quantitative research, these qualitative interviews are considered to be of greater ecological validity, because they provide rich insightful accounts and the utilization of making sense of complex organizational realities (Eby, Hurst & Butts, 2009). This study follows a case study approach, since this research connects theory to practice by contextualizing the new phenomenon of Brexit to a conceptual framework (Gillham, 2000). To conduct this cross-bank case study, bank managers have been interviewed to gather qualitative data. Interviews with four different bank managers have been conducted to ensure that there is a sufficient amount of data that provides breadth, depth, and saliency of data necessary for authentic analysis and reporting (Curtis, 2000), (Lincoln & Guba, 1985). In the literature it is argued that participant numbers depend on the balance between representativeness and quality of responses in obtaining sufficient information (Alvesson &
Ashcraft, 2012). Also, a comparatively smaller number of experts allows for in-depth analysis of the results (Onwuegbuzie & Leech, 2005).
3.2 Sampling
The author used inclusion criteria to select the interviewees: Firstly, participants must work in either a commercial real estate department or a capital markets department in a Ecb which has been conducting business in the UK. According to Gläser and Laudel (2009), an expert must have a special standing in the proposed research context. To ensure that more than one point of
22 view is covered in the context of Brexit, and that valuable information is not missed, the experts are either Head of, Senior Relationship Managers or Associates in a Ecb with various shareholder structures to capture different ideas and values for the business models concerning Brexit. Due to limited resources and time constraints, the number of participants is limited to four. This is justified by the fact that sampling until saturation is an ideal that only works best when resources are unconstrained (Patton, 2015). Every interviewee has at least seven years of relevant working experience in either international real estate or capital financings (Figure 2).
Figure 2 – Information about the interviewees and their primary occupation (own creation, 2020)
The bank managers have been chosen because they are at the center of Brexit and have been witnessing changes to their work on the daily since the UK leave-vote. They can bring valuable information from different points of view as they are involved in the daily operational part of a Ecb and have an additional focus on the relevant processes that ensure a solid strategic implementation of Brexit measures. This combination of having first-hand insights about Brexit strategy implementation while also working on different topics and ensuring the overall bank strategy by delivering their daily work might lead to a special interest in Brexit as well.
3.3 Data collection
3.3.1 Interview procedure
Interviews were used to collect qualitative data based on a semi-structured interview guide (see Appendix G). This interview type is flexible and gives the interviewer the opportunity to ask
23 specific follow-up questions if necessary, to gain further details. It also allows the interviewer to use his knowledge about the questions to explain unclear ones to the interviewee. The interviews focused on experts in order to gain knowledge about their experiences with strategic changes during the Brexit transition. The interview guide provided to every expert were the same, only with slightly different follow-up questions (see Appendices H, I, J, K). Taylor, Bogdan, and DeVault (2015) distinguish between three different types of interviews, here the second type of in-depth interviewing has been used, because it is aimed towards learning about topics, activities and events that cannot be observed directly. In this type of interviewing, the experts are interviewed as “informants” for the researcher. The goal is not to only reveal the own views of the interviewees but also describe what happened and how others viewed it. In the end, by using this type of expert interview the author seeks to develop detailed information and understanding of the experiences and perspectives of the experts. The interviews were all performed via telephone call. Due to the Covid-19 pandemic, personal contact with face-to- face interviews, as well as travelling across borders, was considered too risky. During every interview, only the interviewer and the respective interviewee were present. The interviews were all conducted in German language and afterwards translated and transcribed into the English language.
The interviews were conducted between the 1st November and the 9th December 2020. All interviews lasted between 36-45 minutes in length, and the average interview lasted 42 minutes.
Priorly to the interviews, the participants received an informed consent in German language.
The form contains the confidentiality and anonymity and how this is ensured (see Appendix L).
The interviewees received the opportunity to read the consent form prior to the interview and ask questions before finally signing it. The interviews were taped via audio recordings for multiple reasons: Firstly, it enables the interviewer to fully reconstruct the interviews in a highly detailed manner. Secondly, during the interviews, the interviewer could focus on the content freely without having to take notes simultaneously. This way, the interviewer was able to ask targeted follow-up questions without disturbing the flow of the interview (Gläser & Laudel, 2009).
3.3.2 Document collection
The interviews were transcribed from the respective recorded audio tapes in order to save the data in a reasonable format (Kaiser, 2014). The interviews were coded according to the qualitative approach of content analysis of Mayring (2008). The author used a comparative case study design, so a sample of experts consisting of middle managers and associates from the real
24 estate and capital markets divisions to get a broad picture about the topic from various different sources and also understand the drivers of strategic change implementation regarding Brexit (Kahkonen, 2014). The sample selection was based on purposeful sampling – this is a sampling technique that allows recruitment of participants who can provide rich and in-depth information about the topic under investigation (StatisticsSolutions, 2020). This research design allows the author to get a broad overview of the different perspectives on strategy implementation and group them in categories (StatisticsSolutions, 2020). To fully understand the drivers of strategy implementation it is of key importance to understand the exact nature of transition for the respective departments interviewed. Here, it is important to comprehend the exact implications of Brexit for a particular market. Seale and Filmer (1998) identified the tradition of conducting expert interviews as interview-data-as-resource, meaning, that the interview data collected is taken as reflecting the expert’s reality outside the interview. For this, it is important to keep the answers of the experts in the context it was originally stated so it can be used to answer above stated research question.
3.3.3. Method of analysis
The author used the conceptual model to put the practical interview data into comprehensible categories that are guided by theory (Mayring, 2008), Appendix C). This category application works for prior formulated, theoretically derived topics of analysis and connecting them to the data (Mayring, 2008). The qualitative steps of analysis consist in a methodologically controlled assignment of the category to passages of the text (Mayring, 2008). These category definitions are then put together within a coding agenda (see Appendix D). Here, the texts were separated into different phrases and sentences which include quotations with valuable information. These texts parts were then assigned to their respective codes. Codes that fit together were put into coding groups to differentiate information about strategy development aspects and strategy implementation aspects with regard to Brexit. Hence, the sub-groups start with ‘I1’ – ‘I4’ to indicate which interviewee stated what (Interview 1 – Interview 4). During the extraction of the phrases and sentences, the categories were developed further and sometimes changed to make them fit better. This ensured the flexibility of the information that is valuable and made it possible to easily exclude irrelevant information (Mayring, 2008).
3.3.4. Coding
After the author conducted the interviews, the qualitative analysis of the material according to Mayring (2008) is the most appropriate way of receiving the highest degree of insights possible.
The advantage of answering the research question with this approach is that the material can be
25 fitted into a model of communication – this means, that the interviewed expert’s feelings, experiences, and opinions on the topic are put into a socio-cultural context to convey the effect of the message. By analyzing the material according to (Mayring, 2000) step-by-step, the aspects of text interpretation following the research question can be put into categories which are carefully created by the researcher and constantly reviewed during the process (feedback loops). This works like the following: A piece of information from the transcript is put into one of the categories of the conceptual framework to connect the findings with the theory. ‘Category I1 – Ploy’ means for example, that a passage the researcher identified in Interview 1 fits to the main category ‘Strategy development’ and there in the sub-category ‘Ploy’. This procedure has the advantage of being subjectively comprehensible and makes the results comparable to other studies, e.g., to check for reliability (Mayring, 2008).
The extracted data information and their codes and coding groups were analyzed. The goal was to answer the research question by identifying drivers of successful strategy implementation within Ecbs and to understand why these strategic decisions were made. For the qualitative data analysis, the software Atlas.ti was used. Marsh (2001) listed the following advantages and limitations of using Atlas.ti. Atlas.ti is a proclaimed “Knowledge Workbench” and allows the researcher to smoothly work on common tasks while allowing advances features of analysis.
Also, the computer-assisted qualitative research allows for data preparation and examination, the identification of meaningful patterns, the creation and application of codes and coding groups as well as a refined analysis. These tasks are relatively simple and allow the researcher to save time. Among the advanced tasks the program helps the researcher by refining coding schemes, the creation of hierarchies as well as supporting the identification of overarching themes and relationships and making conclusions about the nature and importance of the collected data. However, “no computer program should or could perform these tasks alone and they should be products of the researcher’s interpretation alone” (Marsh, 2001). Limitations of the software Atlas.ti include a lack of glossary for the researcher to identify complicated constructs as well as the guided manual that is hard to grasp without professional help. The author took part in an online software tutorial – “Webinar” conducted by an employee of Atlas.ti on the 11th of December 2020 to fully understand the program and its vast possibilities.
3.4 Validity and reliability
The validity and reliability of the gathered data within a qualitative study is one of the most important parts (Golafshani, 2003). This section explains how the internal and external validity, as well as the data reliability has been ensured by the author. In order to ensure a solid internal
26 validity, the interviews conducted were recorded to secure that they were correctly understood, and the meaning is not deviated from what the interviewee meant. For the case selection the earlier named criteria – purposeful sampling as well as the professional status within a Ecb ensures a high degree of internal validity. By structuring the research this way, the author also avoids the so-called “elite bias”. This term refers to companies that develop a strategy and its execution by only involving senior people and using only the information and viewpoints provided by them resulting in a biased or unfinished view of the scenario at hand (Pakulski, 2018).
Within qualitative research methods, the use of triangulation to check the validity of an interpretation is also secured by the different interviewees, as they are all different witnesses to the same event, Brexit, and play different roles within it with different interests. This allows for the reduction of reaching false conclusions as contrasting sources have been used (Bergman, 2008).
For the scientific theoretical background, the author used multiple sources. To establish the external validity of this research paper the author interviewed different participants working for different Ecbs in different main occupations. The interviews were conducted in a, for the respective interviewees, familiar and comforting environment to ensure the avoidance of different behavior. Ultimately, the author utilized several measures to ensure reliability: Firstly, the settings for every interview were very similar. The interview guide handed out to the interviewees was the same and the interviews were conducted within a short period of time.
Also, the transcription of the interviews ensures a non-biased analysis whilst maintaining the opportunity for the interviewees to review their respective transcripts. This also increases the quality and reliability of the statements made (Golafshani, 2003).
27 Table 2 - Validity & Reliability criteria (own creation, 2020).
28 4. Results
The results are presented according to the conceptual framework that became evident after the conducted literature review in chapter 2. The concepts regarding strategy development are defined according to Mintzberg (1987) and phrases from the interview transcriptions fitting into these concepts were added (see ‘Exemplary citations’). In Appendix F the most mentioned words are shown. The concepts regarding strategy implementation are defined according to MacLennan (2016) and the same procedure was conducted for the relevant categories as for strategy development. Exemplary citations underline how the results were found by following the definitions for the concepts.
4.1 Strategy development 4.1.1 Ploy
The first part of strategy development, Ploy, is present 30 times in the data across all four interviews and relates to the coding group Strategy development - Ploy. In interviews 1, 2 and 3 is stated that every Ecb developed a strategy on their own. This was done with background checks and scenario analyses to see if the market is going to turn out in their favor or not. In interview 4, it is stated that Ploy does play a role with regard to Brexit as it is a new phenomenon that only affects one market, so it is key to see and understand how the other banks and competitors are reacting. Furthermore, the strategy development of Ecbs is also dependent on the Banking Financial Supervisory Board (BaFin), so not only competitors and other market players are relevant but also these governing institutions as they also have their own opinion on Brexit and if a bank overthrows this perception and goes their own way it would be unwise (Interview 1). This is due to the fact, that every bank must justify their concept of strategy in front of the BaFin and undergo a risk assessment in terms of long-term planning, equity, and available resources (Interview 1). Also, some parts of the Brexit strategy are a given by the European Central Bank (ECB) or BaFin (Interview 3). Furthermore, client relationships were not affected by strategies with regard to Brexit, although uncertainties on the market became relevant, e.g., the booking of loans so that they are “Brexit secure” (Interview 2). According to the data, Ploy is relevant when it comes to strategic practices with regard to the Human Resources department (HR department), as Brexit triggered a lot of moving of employees away from London to Europe (Interview 1). Here, the regulation of products sold in the UK is essential, because if products are unregulated, they can still be serviced from UK after Brexit, like loans but if it is a regulated product this would have become difficult (Interview 2).
29 Table 2 – Contextual categories for Strategy development – Ploy
